Interview with German Airline Boss Lufthansa 'Can No Longer Be Top Dog Everywhere'
In a SPIEGEL interview, Lufthansa CEO Christoph Franz, 51, discusses how to deal with the aggressive competition arising from budget airlines in Europe, rising state-owned carriers in the Gulf states as well as the fallout from a recent ban on nighttime flights at Germany's biggest airport in Frankfurt.
SPIEGEL: Mr. Franz, traditional airlines are no longer earning money in the European market. What's going wrong?
Franz: Budget airlines got their foothold in Europe many years ago and they actually have a larger market share here than in the US, where the idea started. In this respect, we continue to take competition from low-cost carriers very seriously and are working on improving our cost structures, since this is an area where budget airlines have an advantage.
SPIEGEL: What makes your competitors' business model so successful?
Franz: We offer a wide variety of products, services and a broad network of short and long-haul connections that coordinate with one another, and we work with hubs such as Frankfurt, Munich, Vienna, Brussels and Zurich, through which we connect with various points around the world. The low-cost carriers operate away from the major hubs, always flying the same routes between two destinations and often benefiting from subsidies for small airports in remote locations. They sell tickets almost exclusively online, which means they don't have expensive distribution channels. They have lower labor costs and fly with large planes. And if there isn't enough demand, they simply drop their prices until the plane is full. That turned the old airline world completely on its head, since we always selected the size of the jet to match existing demand.
SPIEGEL: And you don't have anything that can compete with this?
Franz: Yes, we do. We have confidence in what we offer: by far the best product for business travelers. Market shares here won't shift appreciably. But the question is also which airlines can participate in market growth to what degree. In this respect, we fared better than our competition this year. Still, of course we're working on our costs and on making processes more efficient. Where in the past there might have been an hour between one plane landing and the next taking off, now we manage it in half an hour. That means instead of three flights a day, I can offer perhaps four on the same route. But we must constantly ask ourselves: Is that enough?
SPIEGEL: Is it possible to win this battle?
Franz: The budget airlines actually grew less in 2011 than we did, and that strengthens our belief that Lufthansa has nothing to be ashamed of. We have also managed to stabilize our market shares again at smaller airports away from the major hubs of Frankfurt and Munich. But the lesson we've had to learn is that we can no longer be the top dog everywhere. We've withdrawn from some areas
SPIEGEL: which are then served by your own budget airline, Germanwings?
Franz: We do take notice when market opportunities for Germanwings arise, just as we have always done. Germanwings has developed its own focus points, in Hanover, Cologne, Stuttgart, places where Lufthansa is not present, or present only in a limited way. But the company isn't seeking extreme growth. We're taking it step by step.
SPIEGEL: Within Europe, you have to compete with budget airlines, and in the long-haul sector against aggressive carriers from the Gulf States. How are you reacting to the challenge?
Franz: By focusing on our strengths. We started extending our network of routes early, by founding the Star Alliance. Then came the expansion of our airline alliance and the establishment of joint ventures. We're always working to offer our passengers a wide selection of destinations with frequent service. We offer more long-haul destinations than the Gulf State carriers. It's true that they're experiencing very strong growth, but they are also working under very different conditions. They are completely state-owned and correspondingly well funded. We, on the other hand, are a joint-stock company with shareholders who expect dividends, and in Germany we have entirely different infrastructure costs and social standards. This is a major challenge for all players on the market, but we have a very good foundation to start from, we're financially stable and we're taking a proactive approach to competition in terms of quality.
SPIEGEL: What does that mean?
Franz: At the moment we're investing more than ever before for our customers, with 3 billion ($4.1 billion) just for new seats, lounges and check-in systems. Then we have 202 new, modern and fuel-efficient airplanes on order, for a total list price of around 19 billion. With the A380 Airbus, we presented a new first class, and in just a few months we'll be introducing a new business class. These are appreciable improvements for our passengers.
SPIEGEL: But Europe is being pushed to the fringes of the global economy, and the flow of air traffic is shifting. How are you reacting?
Franz: I don't believe Europe will leave the playing field of the global economy. We don't want that to happen, and if legal regulations don't restrict us, we'll be able to keep up. But there are other players on the field now, and we need to address them. In the past, we and the American carriers had a large role in defining how things happened. That role is going to change, and other airlines will expand and become major players. The poles of growth are shifting, especially toward Asia and South America, and perhaps also toward Africa. But the shortest route from Asia to North America is across Europe, which also has a geographically strategic position between Asia and South America. Many flight paths from Africa to Asia also pass through Europe. All this means Lufthansa and its alliance partners continue to have good opportunities for growth.
SPIEGEL: In other words, you want to remain a European business and not become a global airline?
Franz: We will become more European and at the same time more global. But for airlines, unlike for other industries, there are only limited opportunities to break into other markets through takeovers. This means airlines have always been creative at finding other forms of cooperation. For example, we were very active in the formation of Star Alliance.
SPIEGEL: The new runway at Frankfurt am Main will open on October 21. Does this mark the limit of the possibility for growth at your primary hub?
Franz: Up until a few days ago, I believed the new runway in Frankfurt would allow new growth. First, though, we're facing a setback for this winter's flight schedule. The ban on nighttime flights, passed by the administrative court in the federal state of Hesse, means we have to give up a portion of our current core business in air freight. Our cargo flights for this winter had already been authorized, and marketed accordingly.
SPIEGEL: Sources familiar with the industry claim the court's decision was foreseeable.
Franz: For us, it's completely incomprehensible. There wasn't a single nighttime flight planned for the new runway, but now the court has ordered a complete ban on nighttime flights for the entire airport once the new runway goes into operation. Instead of progress, this spells a clear setback for Germany as a place of business. The complete ban puts us behind where we are today. Frankfurt Airport and its nighttime flights have indispensable economic significance for Germany as a major export country, and this excellent position is being carelessly gambled away. The freight industry requires nighttime flights, and now it will to some extent seek out other routes through foreign airports. A complete ban on nighttime flights is too high a price to pay for the new runway. Lufthansa is asking the airport not to start operations on the new runway until the pending ruling from the Federal Administrative Court hopefully establishes an acceptable policy on nighttime flights. If we could have predicted this development, our request for a new runway would have looked very different.
SPIEGEL: You talk a great deal about growth, but others are more pessimistic. Air traffic, and especially air freight, is considered an early indicator of economic trends. How do things stand in that regard?
Franz: If air freight revenue is an indicator, then we're facing decreased growth rates, but not a recession
SPIEGEL: as long as there isn't even greater turbulence ahead in the course of the euro crisis. What's your assessment of these developments?
Franz: It's clear we have great difficulties developing persuasive solutions to this crisis, and naturally that worries me. Some countries are too weak economically in proportion to their standard of living. This is a fundamental problem that can't be solved through transfer payments. If we don't get this under control, we'll be confronted with the same problems again and again.
SPIEGEL: Stock prices, including Lufthansa's, are also fluctuating more extremely than ever.
Franz: Much of this is done through computer programs, with the orders to buy and sell sent out in a matter of seconds. This volatility is simply something we'll have to live with. Far more worrying for us is the fact that valuation has so little relation to a company's actual value. Lufthansa is currently valued on the stock market at 4.5 billion. This is less than it was at the end of 2001, after the September 11 attacks, although we've grown enormously and profitably since then. The book value of our airplanes alone is currently almost three times as much as the value of the entire company as measured by stock prices. That's certainly bizarre.
Interview conducted by Dinah Deckstein and Armin Mahler